Brics' new development bank is an idea whose time has come

In order to become a reckonable global force, and make the new bank a success, economic and commercial linkages among Brics member-states must increase significantly

shreerupa

Shreerupa Mitra-Jha | July 17, 2014 | New Delhi



Perhaps the most significant element in the 72-point Fortaleza declaration of the just-concluded sixth Brics (Brazil, Russia, India, China and South Africa) summit is the establishment of the Brics New Development Bank on July 15.

Though the formation of the bank has been an anticipated deliverable of this five-nation conglomerate, the location of its headquarters and the inaugural presidency of the bank have been matters of much diplomatic tugging. South Africa had initially put in its hat for the inaugural presidency but withdrew in favour of India. The headquarters would be located in Shanghai, with the capital for the bank being equally shared among the participating nations.

The bank will start functioning from 2016 with an initial capital of $50 billion and its membership will be open to other nations.  However, the total capital share of the founding members-states should at no point drop below 55 percent.

There will also be contingency reserve arrangement (CRA) of $100 billion, which will help developing nations avoid "short-term liquidity pressures, promote further Brics cooperation, strengthen the global financial safety net and complement existing international arrangements". China will contribute $41 billion, which is the bulk of the contingency currency pool, followed by Brazil, India and Russia chipping in $18 billion each. South Africa, being the smallest economy, will put in $5 billion.

The idea of Bric (South Africa joined only in 2011 at the third summit in Sanya, China) came from a former economist at Goldman Sachs, Jeffery O’Neill, whose report pointed towards the potential gains from the four nations forming a multilateral body. Bric began to take shape around 2006 and the first summit was organised in 2009 in the shadow of the global financial crisis. The first summit of Bric leaders was held at Yekaterinburg, Russia, in 2009 followed by Brasilia, Sanya, New Delhi and Durban.

From its rather modest beginnings, Brics is gathering steam as a potentially strong voice of South-South cooperation. The five countries account for 20 percent of global GDP amounting to $24 trillion at PPP. The foreign direct investment (FDI) into Brics countries have tripled to an estimated $263 billion in 2012, according to the United Nations Conference on Trade and Development (UNCTAD) estimates. Though intra-Brics linkages through FDI are limited, investment between Brics countries is increasing compared to FDI flows to non-Brics states. 46% of FDI flows to Brics go to China, followed by Brazil (25%), the Russian Federation (17%) and India (10%) according to UNCTAD.

Intra-Brics trade stands at $230 billion.

A Brics bank was proposed by the Manmohan Singh government in 2012. India and other Brics member-states have long expressed their displeasure at the inadequacy of the Bretton Woods institutions – the World Bank and the International Monetary Fund – which deny equal voting rights to developing nations. The Brics bank is thus a strategy to hedge against western influence and is purported to complement the World Bank. The bank's main function would be to mobilise "resources for infrastructure and sustainable development projects in Brics and other emerging economies and developing countries".

Though details are yet to emerge, unlike the World Bank, Brics would probably take a more considerate approach towards the issue of attached conditionality.

In contrast to the state of affairs in Saarc (South Asian association for regional cooperation), possible irritants in bilateral relations should not adversely impact the functioning of Brics. In the Saarc bloc, the deteriorating relations between India and Pakistan, the two major economies in the group, had a significantly deleterious impact on its functioning. But in the case of Brics, bilateral equations of the member-states have acquired a degree of maturity.
The border issue remains the Achilles heels in the India-China relation but that has not prevented China from emerging as India’s largest trading partner. At the Modi-Xi Jingpin meeting at Fortaleza, the Chinese president declared, “When India and China meet, the world watches.”

Russia and China have recently signed a $400-billion natural gas deal for the next 30 years. China is Brazil’s largest trading partner.

Pitching up intra-Brics trade and FDI volume would also help the Brics configuration in strengthening its base. As of now, the trading sheet seems skewed. For instance, although China is the largest investor among the Brics countries (almost $425 billion in FDI stocks worldwide), its outward FDI stock to other Brics countries is only 2.2 percent of the total. Of that, South Africa and the Russian Federation have been important targets for Chinese FDI, whereas the stock in India and Brazil has been modest.

On the other hand, the Russian Federation accounts for three-fourths of outward FDI stocks from India among the Brics bloc.

In order to become a reckonable global force, the economic and commercial linkages among the Brics member-states must increase significantly. Otherwise, this remarkable initiative of the New Development Bank might just become another symbolic facet of South-South cooperation – rife in optics but ruefully short of its objective of reconfiguring the international financial order.

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